The IR35 discussion document has two case studies. The one that is probably closest to most CUK people is the Ben/Jo study. We're in general agreement that this case study is deeply flawed, but it would be good to work through exactly which points should be raised with HMRC.
The description:
There are multiple issues, but we'll start with just clarifying how they arrived at the numbers. They are clearly using 2015-2016 thresholds and rates, even though they are proposing changes for future years.
They assume no pension contribution, no expenses. Jo's taxes, in the example, are based on PAYE on £70K. (I got a difference of £3, not sure what is up with that, but it doesn't matter).
Ben's taxes. They appear to be using a salary of £10,600, with Ben's Ltd co neglecting to claim the employment allowance.
THE DIVIDEND TAX
In a classic example of the failure to have joined up thinking, this example was apparently prepared by someone who didn't know about the dividend tax changes. So the first, glaring point is that the dividend tax has already dramatically reduced the disparity between Ben and Jo, even if all other things were equal.
In 2016-2017, Jo will pay £21,976. In 2016-2017, using a salary of £11K and no employment allowance (no longer allowed), Ben and his Co will pay £19,516. Ben's take-home pay is only £2460 better than Jo's, despite the fact he has no employment rights (and the other things we'll cover here).
IF BEN WERE IR35-CAUGHT
If Ben were IR35 caught in 2016-2017, he would be allowed £3500 of expenses, but let's just assume he doesn't have any at all, so that is take home pay for him. Ben and his company will pay £25078 in taxes, which means Ben's take home pay will be more than £3000 LESS than Jo's, even though they do "the same job and work on the same cases." So Ben gets less take home, and has no employment rights, benefits, etc.
If HMRC drags Ben into IR35, they are shafting him badly, even if all other things were equal.
JO IS PAID MORE THAN BEN
Jo's employer pays employer NI for her, but leaves the responsibility for Ben's employer NI to his company. That means Jo has a benefit of £8,541 paid on her behalf at no cost or tax to herself. This does mean more revenue for HMG, but it also means the comparison between Jo and Ben, and the amount of tax they pay, is deeply flawed. Ben and Jo are not equally compensated.
HMG SUBSIDISES JO MUCH MORE THAN BEN
Jo's maternity pay is subsidised at a high level by HMG. Since Ben's salary is low, any corresponding subsidy would be very low.
PENSION AUTO-ENROLMENT
Last time I checked, this was not optional, but it is left out of the calculations here.
If auto-enrolment is functioning, Jo will have a minimum of £2,100 paid into her pension by the employer. For Ben to have the same pension provision, he will have to pay £2,100 out of his gross £70K.
[Jo will also have £3500 of her £70K paid into her pension. If Ben pays £3500 of his £70K into his pension, the tax impact of the £3500 pension contribution is roughly equal between the two of them. Jo's will reduce employer NI (13.8%), employee NI (2%), and income tax (40%). Ben's will reduce corporation tax (20%) and higher rate dividend tax (32.5%). Jo gets slightly more tax benefit from the dividend contribution, but it isn't significant.]
EMPLOYMENT RISK
Jo's employer gives her employment rights. Ben has none, and is not compensated for the difference. The monetary value of these rights may be debated, but they are important. This is something of value which Jo is receiving and Ben is not, so it hardly seems inequitable to have Jo pay some amount of higher tax than Ben.
Jo does not have to set aside funds for times when she is out of contract. Ben does. Again, the cost of this is hard to quantify, but it is important. Just because two people are doing the same work on the same cases and being given the same amount of pounds does not mean their situation is the same. Jo is being given security as well as the monetary compensation. It is not equitable for them to pay the same tax.
The case study doesn't match the reality that there will be periods where Ben's services are not needed, and the engager will not provide work for him and pay him for those times.
CONTINUING PROFESSIONAL DEVELOPMENT
This is required by the Solicitors Regulation Authority to stay on the register and continue in practice. CPD points can be acquired by doing quizzes in journals. Jo's employer will subscribe for her. Ben's will be paid by his company, but that still has to come out of the £70K. A one year subscription to the New Law Journal is £348. They can also attend conferences for CPD, which Jo's employer will cover, perhaps in excess of £1000.
OTHER DIFFERENCES
Jo's employer will purchase her professional indemnity insurance. Ben's will have to be purchased out of his £70K. Jo's employer probably provides a computer for her. Ben very possibly has to pay for his own laptop, including maintenance, software, and upgrades, out of his £70K, spending on average perhaps £400 a year or more.
Jo's employer can provide the following, tax free, in addition to her salary, while Ben, if he wishes any of them, must pay for them out of his £70K: relevant life plan, mobile phone, registration with the Information Commission, access to company canteen, hosting client entertainment (football matches, etc), business cards, health screening/medical checkup, childcare vouchers, training, etc.
COST OF LTD CO
Ben has to pay accountancy fees, and other costs associated with his limited company, such as stationery, website, etc. This all comes out of his £70K.
VAT
Ben's company does not have enough turnover to hit the VAT threshold. He can still register for VAT, of course, and recover the VAT on the expenses above -- but he will have higher accountancy fees if he does, and the VAT he would recover may not be enough to justify the time and expense. Alternatively, he can just pay the VAT on all those expenses.
Jo's employer will recover the VAT they spend in providing all those benefits to Jo. VAT differences were left out of the case study.
CONCLUDING
The differences are so significant that it is hardly inequitable if Ben takes home £2500 more than Jo. If he purchases the same pension provision that Jo receives, the difference in their take-home pay becomes nil, without even considering the other benefits Jo has that he does not have. It would be a gross injustice if Ben, under IR35, were to take home £3000 LESS than Jo, given all the other benefits she receives.
so....
Soliciting corrections, additions, etc.
The description:
Case study 1:
A legal company hires two lawyers in 2015-16 who do the same job and work on the same cases.
The company pays the lawyers gross payments of £70,000 per year.
Jo works as a direct employee. The company deducts income tax and employee NICs from her salary and pays
employer NICs on top. The total tax and NICs paid on Jo’s salary is £30,612 (£22,071 by Jo and £8,541 by the
company).
Ben works through a PSC and does not operate IR35. He pays himself the most tax advantageous remuneration
strategy combining a low salary and dividends. His total tax and NICs liability is £16,900.
A legal company hires two lawyers in 2015-16 who do the same job and work on the same cases.
The company pays the lawyers gross payments of £70,000 per year.
Jo works as a direct employee. The company deducts income tax and employee NICs from her salary and pays
employer NICs on top. The total tax and NICs paid on Jo’s salary is £30,612 (£22,071 by Jo and £8,541 by the
company).
Ben works through a PSC and does not operate IR35. He pays himself the most tax advantageous remuneration
strategy combining a low salary and dividends. His total tax and NICs liability is £16,900.
They assume no pension contribution, no expenses. Jo's taxes, in the example, are based on PAYE on £70K. (I got a difference of £3, not sure what is up with that, but it doesn't matter).
Ben's taxes. They appear to be using a salary of £10,600, with Ben's Ltd co neglecting to claim the employment allowance.
THE DIVIDEND TAX
In a classic example of the failure to have joined up thinking, this example was apparently prepared by someone who didn't know about the dividend tax changes. So the first, glaring point is that the dividend tax has already dramatically reduced the disparity between Ben and Jo, even if all other things were equal.
In 2016-2017, Jo will pay £21,976. In 2016-2017, using a salary of £11K and no employment allowance (no longer allowed), Ben and his Co will pay £19,516. Ben's take-home pay is only £2460 better than Jo's, despite the fact he has no employment rights (and the other things we'll cover here).
IF BEN WERE IR35-CAUGHT
If Ben were IR35 caught in 2016-2017, he would be allowed £3500 of expenses, but let's just assume he doesn't have any at all, so that is take home pay for him. Ben and his company will pay £25078 in taxes, which means Ben's take home pay will be more than £3000 LESS than Jo's, even though they do "the same job and work on the same cases." So Ben gets less take home, and has no employment rights, benefits, etc.
If HMRC drags Ben into IR35, they are shafting him badly, even if all other things were equal.
JO IS PAID MORE THAN BEN
Jo's employer pays employer NI for her, but leaves the responsibility for Ben's employer NI to his company. That means Jo has a benefit of £8,541 paid on her behalf at no cost or tax to herself. This does mean more revenue for HMG, but it also means the comparison between Jo and Ben, and the amount of tax they pay, is deeply flawed. Ben and Jo are not equally compensated.
HMG SUBSIDISES JO MUCH MORE THAN BEN
Jo's maternity pay is subsidised at a high level by HMG. Since Ben's salary is low, any corresponding subsidy would be very low.
PENSION AUTO-ENROLMENT
Last time I checked, this was not optional, but it is left out of the calculations here.
If auto-enrolment is functioning, Jo will have a minimum of £2,100 paid into her pension by the employer. For Ben to have the same pension provision, he will have to pay £2,100 out of his gross £70K.
[Jo will also have £3500 of her £70K paid into her pension. If Ben pays £3500 of his £70K into his pension, the tax impact of the £3500 pension contribution is roughly equal between the two of them. Jo's will reduce employer NI (13.8%), employee NI (2%), and income tax (40%). Ben's will reduce corporation tax (20%) and higher rate dividend tax (32.5%). Jo gets slightly more tax benefit from the dividend contribution, but it isn't significant.]
EMPLOYMENT RISK
Jo's employer gives her employment rights. Ben has none, and is not compensated for the difference. The monetary value of these rights may be debated, but they are important. This is something of value which Jo is receiving and Ben is not, so it hardly seems inequitable to have Jo pay some amount of higher tax than Ben.
Jo does not have to set aside funds for times when she is out of contract. Ben does. Again, the cost of this is hard to quantify, but it is important. Just because two people are doing the same work on the same cases and being given the same amount of pounds does not mean their situation is the same. Jo is being given security as well as the monetary compensation. It is not equitable for them to pay the same tax.
The case study doesn't match the reality that there will be periods where Ben's services are not needed, and the engager will not provide work for him and pay him for those times.
CONTINUING PROFESSIONAL DEVELOPMENT
This is required by the Solicitors Regulation Authority to stay on the register and continue in practice. CPD points can be acquired by doing quizzes in journals. Jo's employer will subscribe for her. Ben's will be paid by his company, but that still has to come out of the £70K. A one year subscription to the New Law Journal is £348. They can also attend conferences for CPD, which Jo's employer will cover, perhaps in excess of £1000.
OTHER DIFFERENCES
Jo's employer will purchase her professional indemnity insurance. Ben's will have to be purchased out of his £70K. Jo's employer probably provides a computer for her. Ben very possibly has to pay for his own laptop, including maintenance, software, and upgrades, out of his £70K, spending on average perhaps £400 a year or more.
Jo's employer can provide the following, tax free, in addition to her salary, while Ben, if he wishes any of them, must pay for them out of his £70K: relevant life plan, mobile phone, registration with the Information Commission, access to company canteen, hosting client entertainment (football matches, etc), business cards, health screening/medical checkup, childcare vouchers, training, etc.
COST OF LTD CO
Ben has to pay accountancy fees, and other costs associated with his limited company, such as stationery, website, etc. This all comes out of his £70K.
VAT
Ben's company does not have enough turnover to hit the VAT threshold. He can still register for VAT, of course, and recover the VAT on the expenses above -- but he will have higher accountancy fees if he does, and the VAT he would recover may not be enough to justify the time and expense. Alternatively, he can just pay the VAT on all those expenses.
Jo's employer will recover the VAT they spend in providing all those benefits to Jo. VAT differences were left out of the case study.
CONCLUDING
The differences are so significant that it is hardly inequitable if Ben takes home £2500 more than Jo. If he purchases the same pension provision that Jo receives, the difference in their take-home pay becomes nil, without even considering the other benefits Jo has that he does not have. It would be a gross injustice if Ben, under IR35, were to take home £3000 LESS than Jo, given all the other benefits she receives.
so....
Soliciting corrections, additions, etc.
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